China has made impressive progress in reforms in key areas though the process remains uneven, increasing vulnerabilities and eroding the buffers to deal with shocks, raising the need for more urgent implementation of reforms, International Monetary Fund First Deputy Managing Director David Lipton said Tuesday.
"China continues its transition to a sustainable growth path and is making progress on many dimensions of rebalancing," Lipton said in remarks made at the conclusion of an IMF mission visit to conduct discussions on the annual Article IV review of the Chinese economy.
"The success of this transition, while difficult and bumpy at times as we have witnessed over the past year, is crucial for China and the rest of the world."
While significant advances have been made in switching from industry to services, there is less progress on tackling credit growth, the IMF top official pointed out. Though there has been substantial liberalization of financial markets, there is less improvement in governance and hardening state-owned enterprises' (SOEs) budget constraints, he said.
"As a result, vulnerabilities are still rising and the buffers to deal with shocks are eroding," Lipton said. "This calls for more urgency in the implementation of reforms."
China's near-term growth outlook has turned more buoyant due to recent policy support, Lipton said. However, the medium-term outlook is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector, he added.
The renminbi exchange rate is becoming more flexible and market-based after changes introduced last year, Lipton noted. The IMF urged the Chinese authorities to keep up the progress with the aim of achieving an effective float within the next couple of years.
Addressing China's high and rapidly rising corporate debt levels is imperative to avoid serious problems in future, Lipton said. "A comprehensive plan and concrete actions are needed to harden budget constraints, especially on SOEs, restructure or liquidate weak firms, recognize and allocate losses, address the associated social costs, and facilitate market entry," he added.
Macro policies should be consistent with lowering vulnerabilities and allowing growth to settle at a sustainable level—around 6 percent in 2017, Lipton said.
In April, the IMF raised China's growth forecasts for this year and next to 6.5 percent and to 6.2 percent, respectively.
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